CAMPBELL, YUSEF LATEEF v. EPIC FOODS LTD

HCCW 63/2024

[2024] HKCFI 2303

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 63 OF 2024

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BETWEEN

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REASONS FOR DECISION

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1.  Before the Court were 2 summonses, namely:

(1) the summons of Epic Foods Ltd (“the Company”) dated 14 May 2024 (“Striking Out Summons”) to strike out the winding up petition presented by Campbell Yusef Lateef (“the Petitioner”) on 30 January 2024 (“the Petition”); and

(2) the Petitioner’s summons to amend the Petition (“Amendment Summons”) to seek a winding up order based on a claim for unfairly prejudicial conduct.

2.  In the course of the hearing, the Petitioner applied for, and was granted, leave to withdraw the Amendment Summons.

3.  At the conclusion of the hearing, the Court struck out the Petition. After hearing submissions on costs, the Court ordered that the costs of both the Petition and the Amendment Summons be paid by the Petitioner to the Company on an indemnity basis.

4.  These are the Reasons for Decision.

Relevant background

5.  The Company was incorporated on 4 July 2018 with 2 founding shareholders, Aswani, Karina S Gagoomal (“Karina”) and Ko Ho Yan, Anita (“Anita”), each holding 5000 shares in the Company.

6.  They were the only 2 directors of the Company until 11 April 2024 when Quinia, Jun Lara (“Quinia”) was appointed a director.

7.  The Company’s principal business was a retail business in meat and foodstuffs.

8.  Soon after its incorporation, on 23 July 2018, the Company engaged the Petitioner as a chef and Quinia, as a shop manager.

9.  On 15 June 2020, Anita transferred 1000 shares to the Petitioner and Karina transferred 1000 shares to Quinia. Such transfers are reflected in the 2020 Annual Return of the Company. Each of the Petitioner and Quinia paid $175,000 for their respective 10% shareholding in the Company.

10.  It is the Petitioner’s case that he became a shareholder as of 4 February 2020, the date he issued a cheque to the Company for his 10% shareholding.

11.  The Company declared and distributed dividends to its members for the 3 years 2020 to 2022 totalling $2,947,498 (“the pre-2023 Dividends”).

12.  The Company paid the Petitioner a total sum of $280,000[1] as his share of the pre-2023 Dividends.

13.  On 30 April 2023, the Petitioner sent a resignation letter to the Company to take effect as of the end of his shift on 30 April 2023.

14.  On 4 October 2023, the Petitioner’s solicitors (“SMC”) demanded that the Company pay outstanding arrears of $90,508.59 (the “Unpaid Dividends”) said to be the Petitioner’s share of dividends distributed by the Company pursuant to the 2022 AGM.

15.  The Company replied the following day. After setting out the dividends declared for the years ended December 31, 2020 to December 31 December 2022 totalling $2,947,498 as reflected in the audited statements and the dividends paid to the Petitioner, the Company requested details of the Unpaid Dividends.

16.  2 months later , on 6 December 2023, SMC served a statutory demand under section 178 (1) (a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“the Ordinance”) on behalf of the Petitioner demanding payment of a sum of HKD 207,283.59 (“the Debt”) made up as follows:

When Debt Incurred	Description	Amount Due as of Today
31 December of 2020, 2021 & 2022	Balance of Creditor’s 10% share of net profits (per shareholders’ agreement)	HKD183,982.00
30 April 2023		HKD23,301.59
	Total	HKD207,283.59

17.  In response to the SD, in its letter of 14 December 2023, the Company took issue with the description of the Petitioner as a “creditor”, emphasising that he is a shareholder and not a creditor and denied the existence of any shareholders’ agreement. Of the Petitioner’s 10% share of the dividends declared for the years 2020-2022 amounting to $294,474.98, an amount of $147,498 was deducted being the profit for January 2020 as the Petitioner only invested Company in February 2020.

18.  On 4 January 2024, the Company resolved that no dividend would be distributed for 2023.

19.  The Petition was presented on 30 January 2024 based on the Company’s failure to pay the Debt to the Petitioner.

Whether the Debt is disputed on substantial grounds

20.  According to the SD, the Debt is based on a breach of a shareholders’ agreement. The Petitioner has not provided any particulars of the terms of the alleged agreement. As no written agreement has been produced, if an agreement exists, it could only have been an oral agreement the terms of which are at large.

21.  In the Petition (at §7), the Petitioner alleges that according to the Company’s audited accounts, “the Company has already declared and distributed net profits as dividends to its members”. The Company’s position is that it only distributed interim dividends that were declared by the directors and denies any agreement or obligation to pay any form of net profits to the Petitioner.

22.  At the hearing, in response to questions from the Court, Ms Mathilda Kwong, counsel for the Petitioner, informed the Court that the oral agreement was made on 30 April 2023, the day the Petitioner resigned from the Company.

23.  The agreement was said to have been made on the basis of unpaid dividends. One of the terms was allegedly the payment of all dividends accrued and unpaid for the years 2020 through 2022 as well as interim profits for the period from 1 January 2023 to 30 April 2023.

24.  It would appear that the terms “dividends” and “net profits” were used without regard to the fact they have entirely different meanings, giving rise to much confusion. As I understand it, the agreement the Petitioner relies on involved the distribution of all net profits as dividends.

25.  It is said to be evidenced by (a) WhatsApp exchanges between the Petitioner and Anita on 26-27 May 2023[2]; (b) WhatsApp exchanges on 24 July 2023[3]; (c) a handwritten note dated 28 July 2023[4]; and (d) an open letter dated 3 August 2023[5].

26.  The context of these exchanges are negotiations between the Petitioner and the Company following the Petitioner’s resignation. In his resignation letter, the Petitioner claimed he was owed unused vacation days, statutory holidays, his initial investment of $175,000 and unpaid dividends, his wages for April and unpaid invoices for wines sold to the shop. Relevantly, there was no claim for 10% of net profits.

27.  As regards the documents relied on,

(a) the 26-27 May exchanges show that in response to the Petitioner’s query, he was told that he could not expect payment till mid-July because of unpaid invoices and the need to finish the 2022 audit as well as the books for April 2023;

(b) the July exchange related to negotiations concerning the price the Petitioner wanted for his 10% shares. At the same time, the Petitioner was given the profit after tax figures for the year ended 2022 and as at 30 April 2023. The Petitioner named a figure. Anita asked if it was “all including & sign the transfer of shares back” to which the Petitioner replied that the figure mentioned was the shares only and he wanted 10% of the 2022 profits and for the period ended April 30;

(c) the handwritten note set out the Company’s net profits for the years ended 2020 through 2023 and the dividends declared for the same period as well as the difference between those 2 figures which is described as “Bal Due”; and

(d) the 3 August 2023 letter was an open offer to acquire the Petitioner’s shares for $200,000 although based on the 2022 financial statements the net worth of the Company was a little over $1.7 million.

28.  There does not appear to be any response to the 3 August letter or, at any rate, it is not in evidence as the next items of correspondence are those described in §§14-15 above.

29.  While the handwritten note in (c) above might suggest some kind of acknowledgement that an amount was “due”, it cannot be read and construed in isolation as it was part of a series of exchanges. The documents relied on show that negotiations had not concluded. They cannot assist in establishing the Petitioner’s entitlement to the Debt.

30.  As matters stand, it is abundantly clear that the Company’s position from the outset is that there never was any agreement that the Petitioner would be entitled to 10% of net profits as its letter of 14 December 2023 shows. That was well before the presentation of the Petition.

31.  Plainly, the Debt is disputed by the Company on substantial grounds.

32.  In the circumstances, the Petitioner has no locus to petition to wind up the Company. It is axiomatic, as stated in Re XJ International Holdings Co Ltd [2024] HKCFI 1378 at §89, that until the creditor is established as a creditor, he is not entitled to present a petition as he has no locus standi : per Ungoed-Thomas in Mann v Goldstein [1968] 1 WLR 1091 (at 1099).

33.  As is the usual practice in such cases, the Petition must be struck out.

Costs

34.  Mr Avery Chan, counsel for the Company, applied for costs for the Striking Out Summons and the Amendment Summons to be paid on an indemnity basis.

35.  After hearing counsel, indemnity costs were ordered.

36.  Mr Chan referred to the applicable principles that are to be found in the judgment of Kwan J (as she then was) in re Hyundai Engineering & Construction [2002] 2 HKLRD 71 at §§6-8:

“6. The power to order costs on an indemnity basis … is not confined to cases which have been brought with an ulterior motive or for an improper purpose …

7. … Where a petition is brought in a situation that the debt is bona fide disputed on substantial grounds so that the petitioner has no locus to present the petition as a creditor, it does constitute an abuse of process …

8 … The implication of such a petition on a company is tremendous. If the petitioner knows of the basis which makes it improper for the petition to be brought, the petitioner should not be allowed to use “high risk strategy” without any penalty …”

37.  The Petition was a clear abuse of process of the Court when, in response to the SD, the Company’s reasons for disputing the existence of the Debt were made known to the then prospective Petitioner. For him to proceed with a Petition in those circumstances was foolhardy and a waste of judicial time and resources.

38.  The problems that plague the Amendment Summons (which seeks to introduce an unfair prejudice claim) were made known to the Petitioner during the hearing.

39.  If a petition is based on the Company’s failure to satisfy the SD, the Company is deemed unable to pay its debts warranting a winding up order pursuant to section 177 (1) (d) of the Ordinance. As the Debt is disputed on substantial grounds, the Petition must be struck out and cannot be cured by way of amendment by adding an unfair prejudice claim since all the pleas relating to the Debt are retained in the draft Amended Petition.

40.  The Amended Petition seeks a winding up order on the just and equitable ground which must presuppose that the Company is not insolvent and that the contributory claiming to have been unfairly prejudiced could realise his investment in the Company. As such, its basis is diametrically opposed to one where the Company is deemed unable to pay its debts.

41.  In Re Wong To Yick Wood Lock Ointment [2003] 1 HKC 484, the Court of Appeal held (at §7) that as winding up by a contributory is a remedy of last resort, it would not be granted on a contributory’s petition if the petitioner was acting unreasonably in insisting upon it where there was an alternative remedy.

42.  In deciding whether a winding up order should be made on a contributory’s petition, relevant factors to be taken into consideration include the following:

(a) The company was solvent, financially sound and profitable. It is not in the interest of any of its members to wind up the solvent company.

(b) There was no prejudice to the petitioner by striking out the claim for winding-up relief. Nor was there any substantive benefit to be gained from a winding-up order which the petitioner would not receive from a buyout order.

(c) The absence of an offer from the Company was immaterial since under section 168A, the court has power to order the purchase of shares at a fair value.

43.  Those considerations exist in the present case. It is common ground that the Company carries on an active trading business that is profitable. Even the Petitioner acknowledges that a buyout order would be appropriate relief: Amended Petition at §53.

44.  In such circumstances, it is incumbent on the Petitioner to explain why he is seeking winding up relief. None has been proffered.

45.  Where the Petitioner persists in seeking winding up relief when the Company’s solicitors have repeatedly warned the Petitioner’s solicitors[6] that it would seek indemnity costs, coupled with the fact that the Petitioner well knew the operational difficulties that a petition would create for an actively trading company, such conduct is thoroughly unjustified and merits an award of indemnity costs against it.